Photographer: Simon Dawson/Bloomberg

U.K. Arms Makers Set Sights Beyond EU in Post-Brexit Pivot

  • BAE Systems says fall in pound lowering prices of weapons
  • Industry seeks closer ties with Turkey, India, South Korea

U.K. military contractors are courting new export markets as the country’s vote to leave the European Union squeezes public finances and raises tensions with EU partners.

Industry representatives have met recently with delegations from countries including Turkey and India, each of which is developing its arms-manufacturing capability with imported parts and designs. Defense contractors such as BAE Systems Plc and Rolls-Royce Holdings Plc, along with parts suppliers like Senior Plc and Meggitt Plc, could get a boost from a fall in the pound in the wake of the June 23 referendum, which makes exports less expensive.

U.K. Trade Minister Liam Fox, a former defense minister, is preparing for a round of promotional trips to discuss new trade agreements and export campaigns. Aerospace, Defence, Security and Space, a U.K. trade group, wants to expand trade relationships with Japan, South Korea, Australia and the Gulf states, said Paul Everitt, chief executive officer of the group.

“Europe will continue to be important, but there are perhaps other areas where there is now a bigger incentive to develop longer-term relationships,” he said in an interview. “Brexit provides the circumstances and the catalyst for faster and more efforts.”

By trying to increase exports, U.K. military contractors have worked to offset cuts in the domestic defense budget since the end of large-scale involvement in ground wars in Iraq and Afghanistan. With many economists forecasting a recession linked to the Brexit referendum, analysts at IHS Jane’s have reduced their projection for Britain’s military spending in 2020 by 2.4 billion pounds, to 44.5 billion pounds ($59.3 billion).

Global defense exports, on the other hand, climbed 21 percent last year, to 63 billion pounds. Growth was fueled by turmoil in the Middle East and concerns about a more assertive China and Russia, which prompted spending increases in Eastern Europe and Southeast Asia. The Farnborough International Airshow in July drew the biggest Chinese and African delegations ever, Everitt said.

Third Place

The U.K. fell to third among arms exporters last year, with a 12 percent share, after the U.S. and France, according to U.K. Trade and Investment. That was down from a 10-year average of 19 percent. Europe last year accounted for about 8 percent of the U.K.’s defense exports, making it the fourth-biggest market after the Middle East, at 63 percent, Asia-Pacific and North America.

The government said in a strategic review in November, part-authored by new Prime Minister Theresa May, that it would lift its role in promoting Britain’s defense exports. That would bring it closer into line with France, which helps coordinate sales campaigns for its arms industry. The report called for the development of a new warship that could be sold to the U.K.’s Royal Navy as well as exported, after BAE struggled to sell its Type 26 frigate overseas.

Brexit will sharpen the focus on exports, speeding up procurement decisions and investment in new technologies, while giving the U.K. greater flexibility on procurement and licensing rules, said Everitt, who had campaigned against leaving the EU.

“We see it as positive and supportive of exporters,” said CEO Ian King of BAE, the U.K.’s biggest arms exporter. The fall in the pound, he added, is helping to make the company’s products “look cheap in terms of the market.”

Lower prices could boost overseas sales of BAE’s Eurofighter, said David Squires, CEO of Senior, which produces parts for the warplane, in an interview. “For the big defense guys,” he said, the weaker currency “will make them look more competitive.”

Aircraft Parts

Stephen Young, CEO of Meggitt, which produces fire-detection systems for Airbus Group SE’s A400M transport plane and parts for Rolls-Royce’s military engines, said his company could benefit if the weak pound lifts overseas demand for U.K. weapons systems. 

Young said he’d seek to take advantage of closer trade agreements with non-EU countries such as India, which under Prime Minister Narendra Modi has been seeking to develop an indigenous defense manufacturing capability.

“We do and always have sold to original-equipment manufacturers around the world,” Young said in an interview. “If those channels are opened up further then obviously we’d be interested in selling more, absolutely.”

The pound’s devaluation has also made the U.K. a potentially more appealing destination for inward investment, said SAAB AB CEO Hakan Buskhe, who is considering expanding the Stockholm-based company’s British operations. Saab currently sources 37 percent of the parts for its Gripen fighter jet in the U.K. and builds unmanned underwater vessels in Southampton, England.

“We have a huge supply chain from the U.K.,” Buskhe said, declining to give details of any plans for expansion. “If you’re a businessman you have to deal with what types of opportunities you have.”

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